Most of the windows were boarded up but some only had bars which let air inside, fanning the flames.

Port Kembla resident Luke Doering was among residents who witnessed the height of the blaze soon after midnight.

"The roof was crackling and caving in. There was all sorts of bangs and creaks," he said.

The extent of the damage is hampering investigations into the cause of the fire.

Yesterday, it was too unsafe to send in investigators or an accelerant sniffer dog, Fire and Rescue NSW Inspector John Hawes said.

Video courtesy of Jake Gonzalez

The chimney where the fire is believed to have started may be permanently compromised.

"Because of the structural integrity [concerns] we're not even prepared to put firefighters in the building," he said.

"There'd still be the occasional roof tile that's falling in."

Mr Hawes said the fire was suspicious.

"There were no utilities connected to the building, nor have there been for quite some time.

"The question begs as to why a derelict building would all of a sudden catch fire and burn with the magnitude that it did."

The primary school relocated to a new site in 2000 after a protracted fight to move it out of the shadow of the copper smelter stack, just metres away.

Port Kembla Copper (PKC) bought the Military Road site the following year.

Some younger buildings on the grounds were demolished because they had become hide-outs for drug users and prostitutes but the original 1916 building was retained for its heritage value.

Community groups, residents and PKC have been working behind the scenes for at least five years on reinventing the site as a multi-function community arts space, with plans for studios and work spaces upstairs and a cafe, offices and a performance space downstairs.

Ann Martin, a Wollongong councillor and Port Kembla resident who was working on the precinct proposal in a non-official capacity, said the proposal had struggled to attract financial backing but was progressing.

An internationally recognised Sydney architect had drawn up plans pro-bono and the site was in the process of being subdivided.

"We've got some state government funding, which was ironically to fix the roof," she said. Mrs Martin received news of the fire via a phone call about 12.30am.

She went alone to the site and stood on the street outside for about an hour, watching it burn.

"I cried a bit," she said. "We were always conscious we needed to keep going or something like this could happen. It's devastating."

Port Kembla Copper general manager Ian Wilson said the site had regularly fallen prey to vandals, who had graffitied the walls and broken inside the building many times.

"We do the best we can to maintain the security and have done for a long period of time," he said.

"I've been working with the community groups for several years to try and bring the [arts centre] to bear. I had no inkling that anything like this would happen. We need to make it safe then I have no idea what the next steps will be."

Mrs Martin was hopeful the building could be salvaged and the arts centre proceed.